Creating new risk retention norms
In the current excess and surplus (E&S) insurance landscape, the industry is grappling with a significant challenge: a lack of reinsurance capacity. With reinsurers prioritising protecting and optimising their capital, 1/1 renewals have been the most challenging in many years. This issue is not only impacting the market’s robustness but also affecting the dynamics of risk retention in the sector.
The current reinsurance market is characterised by all-time high rates and tightening terms and conditions. Fitch has estimated a 20 to 60 percent rate increase for cedants in the overall property reinsurance market at the 1/1 renewals. Such developments have amplified the need for greater risk retention from carriers.
Higher retention levels
Traditionally, many carriers have operated on a fronting model, where no risk is retained on the books. This model has been prevalent due to its ability to transfer risk and the ease of operation it offers. However, the current market dynamics, characterised by the scarcity of reinsurance capacity, are putting this model under intense pressure.
Reinsurers are increasingly expressing their preference for greater risk retention from carriers. They are now more interested in seeing their partners take on a more considerable share of the risk rather than merely passing it on. This shift in reinsurers’ stance led to the emergence of a hybrid fronting model, where carriers historically retained between 5 to 10 percent of the risk.
However, even this hybrid model might not be sufficient to meet the changing demands of reinsurers in an environment with a global capacity shortfall in the tens of billions. The bar is being raised, and companies that adopt a more significant risk retention approach stand to gain.
Emerging risks in 2023 such as the soaring cost of nuclear verdicts, social inflation, consumer inflation, and cyber risks are becoming more prominent in the E&S market. These trends underscore the necessity for insurers to remain flexible and innovative in their coverage offerings while maintaining a strong underwriting discipline.
This is where companies such as AM Specialty are entering the scene. AM Specialty, an E&S insurance carrier and accredited reinsurer, is working to set a new norm in the industry by retaining 30 to 50 percent of its insurance programmes. Such an approach not only aligns with the reinsurers’ expectations but also manifests a commitment to sharing risks and rewards with partners.
The company leverages its robust underwriting expertise and a multidisciplinary approach to write various specialty lines such as property, casualty, transportation, marine, cyber, and general liability. The company’s business model uniquely allows for primary risk-sharing and access to reinsurance capacity for its partners, making it an attractive choice for programme administrators, brokers, and underwriters seeking to streamline programme market processes and optimise value chain efficiencies.
A more significant share
AM Specialty’s commitment to retaining a more significant share of the risk is highlighted by its technical underwriting prowess, in-house analytics, and significant ongoing investments in innovative proprietary software. Key to this approach is the idea that specialty programmes require customised capacity, and carriers must be well-equipped to cater to niche markets with specialised insurance coverages.
In this changing insurance landscape, this approach of higher risk retention is becoming the new norm. A shift towards higher risk retention could not only help in navigating the current reinsurance capacity challenge but also foster stronger, more symbiotic relationships between carriers and reinsurers.
If you’re part of a managing general agent or broker navigating this evolving landscape, AM Specialty invites you to explore a partnership built on trust, empowerment, and shared risk. The E&S insurance carrier and accredited reinsurer is a partner committed to offering frustration-free onboarding, access to decision-makers, and a strong client focus.
As the industry evolves, the way we approach risk must evolve too. Let’s navigate this journey together, where risk retention meets reinsurance capacity to create a stronger, more resilient insurance market.